You Can Profit From a Real Estate Melt-Down

Check This Out!

2011-02-12T15:34:00.001-08:00

Check out the Fannie Mae owned homes. Some are listed below cost of construction.

Put Your Team Together

2010-12-13T16:09:00.000-08:00

I recently heard a real estate broker advise to look for houses with the lowest price per square foot. If you have put together a team, like I talk about in From Paint Rags to Riches, that might make some sense. If you have not, then the cheapest house could quickly turn out to be a costly blunder.

Who do you need on your team? The most important is a contractor. You need somebody who can look at a house and tell you what it is going to need. Second is a real estate person. You need somebody who can look up statistics and help you understand the market. Third is a banker. Unless you can self fund, you need somebody on your team with a source of capital.

With those people in place, perhaps you can look at houses based on price per square foot. After further reflection, you always need those people.

There are deals to be had, but you have to know what you are doing.

Reflation? Get in the Market.

2010-10-19T20:57:00.000-07:00

Reports are that the Fed is ready to crank up the printing presses. The goal is to drive down interest rates and start inflation. How much will your house be worth?

Remember, home ownership allows you to participate in inflation with leverage. Often for 3% down, you can control a large investment. Imagine putting 3% down on a $100,000 house. If the home appreciates at 5% per year, you are increasing your net worth by $5000 per year. That is with a $3000 investment. Where else can you do that? Plus, you can usually use the interest you are paying to reduce your income tax (check with your accountant).

Watch the Market

2010-10-13T22:23:00.000-07:00

Last night I sent some real estate listings to a friend. She may or may not buy a house in the next few months, but she is looking now. That is smart.

It is important to understand the real estate market. It starts by following what is happening currently and trying to project into the future. Watch what is selling. Look for trends. What is sitting on the market and why is it sitting there?

If you want to make money in real estate these days you have to be smarter than in the past. You have to do your homework and use your intelligence.

On the other hand, if you're just looking for a place to live, find a home you love and can afford and go for it. I simply encourage everyone to realize that the home we buy to live in will wind up being our biggest investment and may actually pay off the best. Why not do everything we can to enhance our investment and make some money?

It all starts by watching the market. Find an agent you like and start doing your homework.

Buying and Selling: Is now the time for you?

2010-10-12T20:42:00.000-07:00

Today my mother-in-law closed on a manufactured home. Her home is now for sale and on my listings page. She is down-sizing. The point is that no matter what is happening with the economy, some people will be buying and selling. What about you? Will you miss the best opportunity of your life to buy a home because you are trying to time the bottom of the market?

Running the Numbers

2010-10-06T20:19:00.000-07:00

If you are serious about real estate investing, you must own a business calculator. With a business calculator, you can plug in the interest rate, purchase price and months until payoff and learn how much your monthly payment will be. Or, if you know what you can afford for a monthly payment, you can plug in the months of payments, interest and payment amount and it will tell you how much you can afford to pay for a house.

With a little practice, you can run what if scenarios. What if interest rates rise? What if house prices fall? You may find that while you wait for house prices to fall a little more, interest rates could go up and price you out of the market.

That's what I mean by running the numbers.

Banks: Did they out smart themselves?

2010-10-04T21:32:00.000-07:00

Several of the largest banks in America have stopped foreclosures in 23 states. The problem? They have to go through judicial foreclosure. Of course, attorneys have come to the rescue with what are called foreclosure mills. Unfortunately, the attorneys did not always give the home owner due process. Now the states are cracking down.

Add to the mix that the banks can't find the mortgage paper. The mortgages have been sold many times, quickly, and in a manner to disguise what is really being sold and by whom. The result is that there is no clear chain of title to the mortgage. The bank can't foreclose. The home owner can't sell because there is a cloud on the title. Title insurance companies won't insure. The plot thickens.

So, the dumping of foreclosure properties is being stalled. This may be a breather for home owners and may help prop up the real estate market. Apparently, millions of homes will not be foreclosed any time soon.

There are still buyers. What will they buy? Homes with clear title. Perhaps we are at the beginning of the real estate upturn.

New Home for Used Price

2010-10-01T20:44:00.000-07:00

After looking at many manufactured homes, we've settled on one that needs a lot of work. However, the price is right. After new kitchen, new bathrooms, new walls, new flooring, new roof and new siding the total investment will be the same as homes of the same age with no updates.

To do this right, you have to study the market and have a contractor who can pencil it out. Even then there are often surprises. We shall see.

It is fun to look

2010-09-25T19:46:00.000-07:00

Today we looked at a couple of manufactured homes in a park. Both are the same age. One has been painted inside. Painted trailer panel was not a good idea. Ben and Chris are estimating the remodel cost for one and we'll determine how much it will be worth when done. I enjoy the process.

Got Credit?

2010-07-05T11:47:00.000-07:00

Your home is your most valued investment. Well, after your health and family and ... Okay, it is your most valued financial investment. Unless you have a large portfolio or own a business, your home is your best chance to enhance your future and provide for your retirement.
In order to utilize real estate as a financial vehicle, you have to understand the basics. You have to understand leverage. For example, what other investment can you put down $3000 and control $100,000? That's leverage!
You can deduct the interest on your home mortgage from your income to reduce your taxes.
You have to live somewhere. Run the numbers. My mother bought a home in 2007. At the end of 2008 she had more money than when she was renting a condo that was smaller than her house. The reason? She was able to deduct the interest and her payment was about the same as her rent. Now she has refinanced and her payment is less than her former rent.
If you don't own your personal residence and have good credit, it is time to run some numbers and do some shopping.

Is it time yet?

2007-12-09T11:24:00.000-08:00

My blogs of one year ago forecast the current housing mess. Is it time to start buying yet?
Although many are predicting a longer downturn and a disruption of the credit markets, it may soon be time to begin buying homes. It is difficult to predict the exact top or bottom. If you followed my advice, you may be sitting on a home with negative equity, but you should have a cash reserve so that you can make the payments until the market turns.
If you sold your home, we are approaching a perfect storm: interest rates are falling and so are home prices. If you have done your home work, now is the time to look for a deal. Flips are still possible but only the discerning will make money.
Ideally you are out of the market and looking to get in. If so, find a home you want to live in for 5 years and negotiate a great price and a great interest rate. Then, make your improvements and wait for the equity to grow.

A Three Year Cycle

2006-12-26T17:46:00.000-08:00

An article in my local paper stated that the current downward trend in the real estate market could be the beginning of a three year cycle. That seems like a good possibility to me.
It took several years to get where we are and it could easily take several years to get back to a normal market. The key is the psychology of the market.
First sellers will deny that the market is going down. Buyers will take more of a wait and see approach, which helps force the market down.
Second, sellers will admit that it is going down but will price their homes behind the downward trend. Buyers continue to wait. That extends the length of time homes are on the market.
Third, sellers begin pricing their homes appropriately but believe that the market will go down forever. Buyers begin buying here.
Fourth, sellers price their homes below what a realistic maket would demand and buyers begin bargain hunting.
That change in psychology will not happen overnight. Three years is probably about right.

Is the Market Soft In Your Area?

2006-12-18T09:18:00.000-08:00

Do you see for sale signs every where you look? Do signs seem to be on houses longer and longer? Are real estate agents telling you that the market is still strong?
The answers to those three questions in my area are all yes. So what is happening?
It appears that home sales are about what they have been historically. Lets say we are selling 200 houses per month and that is about the same rate as a few years ago.
The difference is that our community is much larger than a few years ago. There are more houses on the market. If we divide the number of homes being sold by the total number of homes in the city, we find that the percentage is falling. If we divide the number of homes being sold by the number of homes available for sale, we find the percentage is falling.
There are still buyers out there. It is a buyers market in my area.
Ask your agent to compare the numbers for you. How does your area compare?

Going Up in a Down Market

2006-12-11T11:55:00.000-08:00

By now those of you who have followed my advice have conserved cash and have the resources to make your payments while you wait for the market to head up once again. Or, perhaps you sold your real estate in anticipation of the down cycle and are now looking for opportunities.
That is what I am doing, looking for opportunities.
What is a good price for a home given that prices seem to be headed down?
There is a statistical term known as regression to the mean which may be appropriate here. The term indicates that a sample of data will tend to go toward the general data given a new sample.
In the case of real estate investing, real estate has been appreciating at an average rate for many years. The average will depend on your area. Recently real estate has appreciated at an above average rate. It was pushed abnormally higher by market enthusiasm. It will probably be pushed abnormally lower by a lack of enthusiasm.
The key factor is to know the average and where your area stands relative to that average. Also key is realizing any factors which may be long term factors changing your area's average.
In any case, the smart money always buys in a down market.

Market Cycles

2006-03-14T10:15:00.000-08:00

An article in my local paper stated that rising interest rates are cooling the real estate market. Although rising rates are one factor, to blame the entire market on that one factor is rather simplistic. The stock market is back up near its previous highs. It is looking more and more attractive. Interest rates on certificates of deposit are up around 4%. A 4% secure return with no effort and no risk is looking more and more attractive.
On the other hand, people are still trying to get a 15-25% return on real estate. I just went through a house that one of my chiropractic colleagues put on the market. She is asking 30% more than she paid for the house two years ago. She has done no improvements to the house. She may be dreaming. We shall see.
Remember markets go up because demand exceeds supply. As supply catches up with demand it will often overshoot. Then if demand shrinks simultaneously, we have the makings of a buyer's market.
According to www.zillow.com the real estate market in my area peaked last October. Wise investors will be looking for value. If your prospective purchase did not go up more than 3% per year for the next 10 years, would you still buy? If so, then go for it.

Tax Advantages

2006-03-07T17:38:00.000-08:00

I have to laugh when I hear people talk about the tax advantages of owning real estate. Of course the interest is deductible. However, if you have a 6% loan on a $200,000 house, the interest is $12,000. If you are in the 30% tax bracket, that means you will save $4000. What if you are losing $6000 per year on your deal? You are still in the hole $2000.
If your $200,000 house stays rented and you are only losing $500 per month, then it only has to appreciate by 1% per year to make up for the $2000 loss. Also keep in mind that if your house is renting for $12,000 per year, you haven't gained anything in taxes. Your $12,000 interest write off simply offset the $12,000 additional income.
Of course, you also have depreciation which may help your tax situation. Remember, you will have to pay tax on the depreciation when you sell. Enter the 1031 exchange, which can help you delay taxes on investment properties by purchasing another property.

Real Estate Can Go Down Too

2006-03-02T10:29:00.000-08:00

Last year we made an offer on a house. It was listed at $178,000 and needed a lot of work. We made an offer that would have been a net to the seller of $170,000. The seller declined. Now the property is listed at$168,000.
Buyers are becoming smarter. The crazy days of buying anything and expecting a 25% per year mark up are coming to an end.
Do your homework and buy value.

Real Estate Deals Are On The Way

2006-02-26T21:52:00.000-08:00

Today I went to an open house. The seller bought the house last September for $195,000. He painted the inside and replaced the carpet. He has about $2000 invested. His asking price? $230,000. He is offering seller financing.
We will be seeing more seller financing offers as sellers attempt to find buyers for houses with inflated prices. Do the math.
The house mentioned above would rent for about $1000 per month. At 6% interest over 30 years, the payment for principle and interest would be $1379. Add another $200 per month for tax and insurance and you are losing $579 per month. Over 12 months that is $6,948. The house has to appreciate by 3% just to break even. Three percent is the average appreciation which can be expected. Add in repairs and you could be losing money.
The real catch is the house mentioned above needs new siding and a roof. After replacing the siding and roof, the house is still only worth the asking price of $230,000.
Of course I have overlooked the tax advantages of owning the house. You can deduct the interest from your income and perhaps save 30% in tax. However, I also ignored the possibility that the house would sit vacant; as it has for the last few months.
My advice: Sit tight. Deals are on the way.

House Sales Slump Again

2006-01-28T10:36:00.000-08:00

Well, now we have learned that last month sales of pre-owned homes fell once again. That makes three months in a row. The real estate market should be picking up in March. March, April and May will be telling months.
In my area, prices are still crazy. More construction is being planned. Homes that are selling seem to sell quickly. The high prices properties are sitting.
If real estate prices remain flat, it will be important to prices your property at or below what you consider to be market value to obtain a quick sale. You can no longer price the property high and allow it to sit while the appreciation catches up with it.
It is more important than ever to buy property at a good price and count on fixing it up to make money. Betting on a crazy market is a fool's bet.

Is Sanity Returning to Real Estate?

2005-12-28T09:57:00.000-08:00

As we hear more stories about a calming of the real estate market, many people will decide it is time to get out. More houses will then go on the market creating a downward pressure on prices. When the price gets low enough that rents are once again higher than mortgage payments it will make good business sense to get into the market.
During the recent insanity, many people made a lot of money. Some people will now lose money. The key to investing is makeing wise business decisions. Hoping to buy a property with a 25% return by flipping it the next year, with no investment of labor or capital, is not a realistic investment.
Soon it may be time to return to real estate as a stable long term investment.

Chill On Real Estate Market

2005-12-20T17:50:00.000-08:00

A headline in my local paper read something like the title on this blog. Houses are sitting on the market longer. Some sellers are lowering their prices to make a deal. Some of the steam seems to be leaving the market. That is good.

Wild speculation is a receipe for disaster. Whether it is real estate or stocks, when people invest expecting a huge short term gain, that is gambling not investing. Gamblers often lose in the end.

In my book, I talk about creating a real estate investing business. Not pie in the sky. No get rich quick schemes. No how to flip your house before you buy strategies. Just a simple, common sense, business approach to real estate.

For some time now, rents have been lower that mortgage payments. That makes no sense. Why buy when you can rent? Why buy a rental house as an investment property when the rent payments can't pay the mortgage? Do you like negative cash flow? Do you like flushing your money down the toilet?

The only reason people have been doing that is the hope of a 10 to 30 percent per year return on their money due to appreciation of the property. With the possibility of that fading, sanity will now enter. People will invest based on sound business reasons.

When you can make money, based on a sound business case, it will be time to re-enter the real estate market.

Home Sales What Is Really Happening?

2005-11-30T10:37:00.000-08:00

A day or two ago we were told that existing home sales were down. Yesterday we were told that new home sales are up. What is really going on?
An article in The Wall Street Journal yesterday stated that the price of newly constructed homes had only increased by 0.9% over last year. Sales of those homes with nearly flat prices had increased.
My guess is that the people who are trying to sell their residences or investment properties have not yet figured out that demand is falling. They are still trying to get a double digit rate of return. Some of them may have even bought the houses only a year or two ago, hoping for a huge profit. That just may not be happening. How long will it take the average homeowner to figure out what the professional builders have already learned?
If you are not in a position to make your payments for several years, you may want to think about getting out of real estate. Set a reasonable price and sell quickly. Recoup your investment and analyze the situation.
With the stock market increasing, real estate will be a poor investment unless it cash flows or is a personal residence.

Stocks Going Up

2005-11-23T09:17:00.000-08:00

The rise in stock prices is another signal of the end of the real estate bull run. As the rise in prices of homes begins to flatten, investors are looking for a higher return on their investments. Stocks have been sitting with the Dow just above 10,000 for several years. With real estate making spectacular gains, many people have moved money out of stocks and into second and third homes to take advantage of the market. Will they hang on to those homes when stocks begin to move up and their home prices do not? Will builders slow down before a glut hits the market? Those are the questions successful investors will be asking.

There Are Multiple Considerations When Selling a Home

2005-11-05T08:55:00.000-08:00

With interest rates at 6%, a homeowner is paying $1000 in interest every month on a $200,000 house. That is something to consider as homes begin to sit on the market. A few months ago we made an offer on a house. The seller decided to accept another offer. The deal fell through. We made another offer. The seller decided to accept someone else's offer. The deal fell through. Now the seller has reduced his price to what we offered several months ago. In the meantime, the seller has paid thousands of dollars in interest.
The seller had demonstrated poor judgment in evaluating prospective buyers as well as looking at the expenses. My son is in construction and can perform nearly all of the needed repairs. The other prospective buyers have backed out after seeing the inspection reports.
With home prices softening and rentals increasing, carefully consider your offers. Consider how much it is costing you to own a property. If you own a property without a mortgage and it is vacant, you still have the opportunity cost of interest on your money. For example, if you can get 3% interest on your money, a $200,000 investment would make you $500 per month. That is a real cost that should be considered as your property sits vacant.
When it is time to sell, there are many factors to consider. First you want a buyer who will close the deal. Second, you want to maximize your profit. Maximizing profit does not always mean getting the highest price. Sometimes a quick closing with a lower price is preferred.

Rising Interest Rates

2005-10-14T12:28:00.000-07:00

As interest rates begin to rise, people may feel compelled to buy that next home quickly while they can still afford the payments. That may or may not be a good approach.
By my calculations, many homes in my area that are in the $400,000 range have an extra $80-100,000 of profit which might shake out if interest rates continue to go up. Using a financial calculator you can determine what will happen to your payments if interest rates go up. You can also hold your payment constant and increase the interest rates to determine how much less house you will be able to afford. With the knowledge that there may be $80,000 to give away, can you still afford to buy?
As always, if you find the house you like at a price you can comfortably afford go for it. If you are afraid that an investment property might get away, do some calculations.

Real estate - cool down or melt down?

2005-10-09T22:30:00.000-07:00

With more articles going negative on real estate investing, it is important to keep your perspective. When nearly all articles were positive and reporting 25%+ gains, I advised making every investment pencil out without counting on high short term appreciation. With reports of slower turnover of real estate, my advice still stands.
If you are buying a house you love and want to live in for ten years and you can make the payment easily - go for it. If you are waiting for a deal, you might be able to save some money in the short term. However, you might also lose your dream house.
In my area, I'm estimating that the typical $400,000 new house has somewhere between $80-100,000 profit for the builder, over and above what some might consider a good profit. In other words, if the market really slows, builders could afford to take 20% less than they are asking and still make a good profit. Indeed, price reduced signs are becoming quite popular.
As homes begin to sit and the inventory of rental units climb, offer less and see what happens.

Inflation?

2005-10-07T17:30:00.000-07:00

The investment community is now watching what effect rising fuel prices will have on inflation. The fear is that the Fed will continue to raise interest rates to cool inflation and kill our economic recovery.
Indeed there is precedent for such concern. Back in the 1970's we had a stagnant economy with inflation. President Jimmy Carter termed it stagflation.
One thing is certain, rising interest rates are good for savers. Yield on low risk investments should be improving. Keep your eyes open.

Decline in home sales

2005-10-05T10:11:00.000-07:00

National news yesterday was that existing home sales were down by 9% in August. It was tauted that the hot real estate market is cooling off. If so, this is the beginning of a significant investment opportunity. It is more important than ever to understand the principles of value and apply them as you purchase your investment property.

Are Real Estate Prices on Decline?

2005-10-03T10:11:00.000-07:00

Yesterday I learned that a house I have been watching now has a sale pending for approximately 40% less than the asking price. Are prices declining?
While I could use that one house as evidence to say yes, the truth is that the house was overpriced. The owner was taken by an agent who claimed he could get an extremely high price to wow the owner into a listing contract. It is an old trick. It obviously still works.
Choose your real estate agent just as you would choose any other professional. Ask around. Find someone with a good reputation. Find someone you can work with.
Don't just go with the one who claims he can get the highest price. Don't just go with the one who offers the lowest commission. Although you will be tempted to do both of those.
Would you choose the lowest price doctor? (Many do by choosing the one their insurance pays for. This might be a poor example.) Would you choose the cheapest attorney or accountant?
Hopefully when you choose professionals you choose quality.

Are the Real Estate Worries Over?

2005-09-29T08:42:00.000-07:00

I heard on the radio that Dr. Greenspan is no longer concerned about the effect of the real estate bubble on the economy because the majority of Americans have enough equity in their homes to take the hit. Notice that he did not say there would not be a downturn in the real estate market.

If the US economy continues to grow and provide jobs and if the jobs provide wages which allow workers to make their house payments the real estate market could see a soft landing. However a more careful analysis of Dr. Greenspan's comments reveals a caution about the sales of second homes.

If the appreciation of real estate abates, many people who bought second homes as speculative investments may decide they would rather invest in something with a greater return. In interest rates continue to rise, there will be a smaller pool of prospective buyers for those second homes. That combination could spell a decrease in home values in the short term.

Is this a good investment?concluded

2005-09-26T08:56:00.000-07:00

If you have read the last two posts I hope you realized that the house in question might very well be a good investment for a long term investor who can afford the negative cash flow. Everyone's situation is different. My point is: If you can't afford the negative cash flow and you bought the house to take advantage of quick appreciation, you could be a big loser.

Is This A Good Investment? Continued

2005-09-24T12:53:00.000-07:00

Last time I wrote about the potential investment property my son and I were evaluating. My son didn't want negative cash flow. I mentioned that if you could afford $334 per month in negative cash flow perhaps you should just save your money. Lets look at that idea.

If you put $334 per month into a bank savings account, at the end of one year you would have $4008. At 3% interest, the interest the second year would be $120. So at the end of year two you would have the original $4008 plus $120 interest plus the second year savings of $4008 for a total of $8136.

At 5% interest on $174,000, we would be paying $8700 in interest the first year. At $600 per month in rent, our total was $7200 for the year. So our first year as landlord we lose $1500 from the interest alone. Remember we still have to account for repairs, vacancies, insurance and taxes.

Perhaps you think you are saving money in taxes. After all $8700 in interest is deductible from your income. If you are in the 30% tax bracket, .3 times $8700 is $2610 you will not pay in taxes. Not so fast! You also had an additional $7200 in rental income. So you must subtract your interest expense from your rental income (7200-8700= -1500). You will save .3 times your loss of $1500 or $500 in taxes. Now the loss the first year is only $1000.

How about getting even more realistic? Add in property taxes and insurance (approximately another $1800) we have a loss of $3300 (1500 plus 1800). Subtract the tax savings (.3 times 3300= 990) and we have an after tax loss of $2310. If we divide $2310 by $174,000 we get .0133. The house must appreciate by 1.3% just to cover the loss.

That seems like nothing in today's real estate market, but remember that a more realistic average appreciation is 3%. At 3% it will be over three years before the appreciation will cover the loss and the real estate commission, just to break even.

However for every percentage point our house appreciates we get $1740. If it depreciates we lose $1740 for every percentage point. Will it appreciate faster than 3% or will it depreciate? That is the question.

Is this a good investment?

2005-09-17T10:17:00.000-07:00

Yesterday I helped my son look at a house. The seller is asking $174,000 and according to the agent it is a "real fixer - it needs foundation work." However the agent also says that the house has always been easy to rent for $600 per month and the seller will take terms as long as the closing costs are met, which means $14,000 down. Is that a good deal?

If we assume that the seller will take zero percent financing, can we make any money? $600 per month times 12 months is $7200 per year. With zero percent financing we would be making 51% on our $14,000. It would take just over 22 years to pay off the remaining $160,000 at $600 per month. We still haven't included the costs of taxes, insurance, repairs and vacancies.
That is assuming the seller is willing to take zero percent financing.

What if we finance the house at 5%? With a 30 year loan at 5% interest the payment would be $934.07 per month. Take away the $600 for rent and we are going in the hole $334.07 per month. We still haven't included taxes, insurance, repairs, and vacancies. Can you spend $334.07 per month, minimum, to own a fixer? If so, perhaps you should just save $334 per month.

In the next comment we will look at alternative ways of analyzing this investment. In my son's case, he doesn't want the negative cash flow.

Katrina's Impact

2005-09-10T09:59:00.000-07:00

It seems impossible to predict the impact of Katrina on housing prices. The cost of materials for new construction and remodels will go up. The demand for housing in areas adjacent to the destruction is increasing. Both of those factors would lead to increased prices.

On the other hand, if the impact of the storm causes increased prices for gasoline, and other products, the result is less income available for rents and housing payments. The result is a downward pressure on price.

More on the Housing Bubble

2005-08-01T16:22:00.000-07:00

The real estate trade group announced that existing home sales rose 2.7% last month (The Wall Street Journal, July 26,2005). Condo sales are even stronger than single family homes. Although most of the article is about the strength of the market and the increase in average price, I don't see any depth of analysis.

Is there true appreciation of real estate? Or are people with lower valued homes not putting theirs on the market? In my area, any home under $200,000 seems to go quickly (if it is fairly priced) while those over $500,000 seem to be taking longer.

The author, Kemba Dunham, did point out that some builders in Chicago have reported sales of condos are slower than expected.

Another article in the same paper reports that lenders are continuing to loosen credit. That may indicate that the strong borrowers (smart money) are already out of the game.

It is a good time to be making intelligent choices. Look hard at your deal and your ability to repay your loans.

Has Greenspan Gone Impotent?

2005-07-06T18:01:00.000-07:00

As the Fed continues to raise interest rates and mortgage rates refuse to rise, the power of the Fed chairman is called into question. What is happening?

Is it possible that the appetite for money is so low among corporate investors that mortgage borrowers are the only game available?

With the stock market sinking and bond yields still low, where is an investor to turn? Real estate seems to be the only investment still rising. How long can that last?

It might last a while if business picks up enough to raise individual income. Rising incomes with continued low interest rates might allow the real estate market to cool without a crash.

My advice continues to be to sit on cash unless you see a really good deal.

The Coming Housing Glut

2005-06-22T08:14:00.000-07:00

Those who have been reading my comments must have found the front page article in yesterday's USA Today quite interesting. There is an abundance of unbuilt homes on the market. According to the article, there are 80,000 unbuilt homes now listed on the market. That compares to 60,000 last year and 40,000 five years ago.

Is there a housing glut? Will there be a housing glut when those homes are finished? Those are the questions.

The stat to watch is days on market. The days on market is the number of days from the time the home is listed until it is taken off the market due to a signed purchase and sale agreement. If the average days on the market increases, that means there are more sellers than buyers and in any market when there are more sellers than buyers there is a downward presssure on prices.

There may be another reason that homes are being listed before they are built: to test the market prior to construction. My son just listed a vacant lot with plans which have been submitted for permits. If someone buys the lot they can build it themselves, or hire a builder (perhaps him). However, if nobody buys the lot, he will have to make the decision whether to build on spec or wait. In his case, he can build on spec and live in the house.

However, for larger builders that is not an option. Presale of houses may actually keep the glut from happening by alerting builders to slow down before the supply gets out of hand.

My personal opinion is that we are already past that point. Time will tell.

More On The Home Improvement Industry

2005-06-12T21:43:00.000-07:00

Froth in the housing market was once again the subject of radio and television interview shows this weekend. However, I have still not heard anyone refer to what I am now terming the home improvement industry. By home improvement industry I do not mean home improvement stores.
I mean homeowners improving their properties.

I maintain that home improvement is what is driving the market. Many Americans have seen very small if any increases in their wages. However, by improving their homes, they have been able to either sell or refinance and obtain extra cash.

When the economy took a dive in the early part of this century, many of us were forced to tap home equity to survive. Lowered interest rates helped make that extra cash less worrisome.

In fact, with lowered interest rates and tax incentives, many of us learned that we could supplement our income quite nicely by home improvement.

Some believe that the rise in home prices is something that is just mysteriously happening or that it is the result of low interest rates. Those who don’t understand are buying houses and expecting them to appreciate with no effort on the part of the owner. That is the cause of the speculation which is occurring.

Will the bubble break?

The mortgage interest rate is staying low because every time it begins to rise, demand slumps. Many mortgage firms have already cut back their offices or work force. With no better investments at hand, investors are opting for a low return rather than no return.

The Fed is up against a larger conundrum than many are saying. If mortgage interest rises and housing prices flatten out, average Americans will no longer be able to supplement their incomes with their home equity. That is fine if the economic recovery is robust and wages escalate. However, if wages stay stagnant, the result could be a recession with deflation such as has occurred in Japan.

It is my hope that many will see the truth and stop wild speculation. I think it is already happening. Housing sales in my area are down this year. The average price of homes that are selling is well below the average price of what is on the market.

Every industry is getting more competitive. Soon, builders are going to have to accept less profit to get their properties sold. This will also affect the home improvement industry. I only hope the economy improves quickly enough for homeowners to put down their paint brushes and get back to their primary jobs, before they lose their homes.

The Home Improvement Explosion

2005-06-09T16:19:00.000-07:00

I titled my book From Paint Rags To Riches: Becoming a Real Estate Millionaire, to indicate the power of home improvement. I believe that is the underlying cause of the rise in real estate prices. Those who believe that real estate just magically increases in value faster than inflation are just being stupid and will be the ones who get burned.

After reading several articles containing opinions of different people, I decided to look for some actual evidence. Today I looked at the Home Depot web site. Consider the following:

Home Depot started in 1979 with 3 stores and $7 million in sales.
In 1990, Home Depot had 145 stores and $3.8 billion in sales.
By 2000, there were 1123 Home Depot stores and they made $45.7 billion in sales. The most recent figures were for 2002, 1532 stores and $58.2 billion in sales.

All of that money is just for supplies and doesn't account for the labor which is going into home improvement. Those numbers are just one chain store.

Homeowners are adding value to their homes like never before. As I say in my book, they are buying a second job. The smart ones will do fine. The people who don't know how to recognize value or how to profitably add value to a property will be the ones who will lose money.

Refinance NOW!

2005-05-31T09:02:00.000-07:00

After saying that the housing market could fall similar to the .com crash a few years ago, an economist told a nationwide radio audience not to refinance their homes. His reasoning was that if you have substantial equity in your home and you refinance, you will owe more than the home is worth if the value of your property declines.

That is certainly true. However, during the recent economic recession, may people were kept afloat by refinancing their homes. They were able to refinance because the value of their homes was increasing. They were able to use the money to compensate for reduced hours, reduced salaries, or reduced business.

If housing prices fall, we can expect to see another recession. This time homeowners will not be able to refinance. If they cannot make their payments, homes will be foreclosed. Even the best of us can face job loss or reduced business activity. How can you prepare for such a situation?
Refinance your home now and sit on the money. Let me give you an example. Suppose you have a home worth $300,000 with a $200,000 mortgage fixed at 6% for 30 years. You are paying around $1200 per month.

Suppose the value of your home declines 20% to $240,000. At 80% loan to value, you would only be able to borrow up to $192,000. You already owe more than that. If business slows and you can't make your payments, you may lose your home.

However, if you refinance your home today at 80% loan to value, you could borrow up to $240,000. If you put $40,000 in a savings account in the bank, you may get 1.5% interest. Your payment on a $240,000 mortgage at 6% for 30 years is about $1439. Your payment increased by about $239 to give you $40,000 peace of mind.

Wost case scenario, you lose your job and you would be able to make your mortgage payment for 27 months with the $40,000 you borrowed. If things go well for you, you have $40,000 to help someone else by buying pre-foreclosure properties.

Conclusion: REFINANCE NOW!

Are Homes Over Priced?

2005-05-25T08:42:00.000-07:00

The Monday, May 23 edition of The Wall Street Journal, had a front page story with the following headline: "As Prices Rise, Homeowners Go Deep in Debt to Buy Real Estate." The article featured a couple who refinanced their home a year ago and took $25,000 to use as a down payment on another property. That worked out well so they did it again. Now the couple has $1.4 million of equity in nine properties and is $2 million in debt.

The authors' point seems to be that if the rapid appreciation in home values slows or depreciation sets in, the couple will be stuck with $2 million in debt. However, further in the story we learn that the couple uses a technique of buying pre-foreclosure properties and renting the properties back to the sellers. Using that method, the couple is probably buying the properties at 80% of market value. With $1.4 million in equity, that seems to me to be smart investing.

On the other hand, the authors also report that a real estate broker and his partner also took out home equity loans and invested in a house. They bought a house for $340,000 and invested an additional $25,000 for improvements. When the Fed began raising interest rates, their home equity interest increased. The pair finally sold the house for $380,000 and realized a $10,000 loss after figuring financing and closing costs.

These two situations make good points. In this market you must understand how to determine value. You must not pay market value for your investment. You must know that you will be able to rent or sell the house quickly. These are all part of the business of real estate investing. My book, From Paint Rags to Riches--Becoming a Real Estate Millionaire, is a great resource to help potential investors stay out of trouble. Obviously, you can't trust a real estate broker. They may not be any smarter than any one else.

Saving On Real Estate Commissions

2005-05-12T10:36:00.000-07:00

Should I list my house with a discount broker, pay a full service broker, or sell it myself? That is a question more and more people will be asking themselves as the options increase.

As I state in my book, From Paint Rags to Riches, one of the advantages of having an agent, which is frequently overlooked by both buyers and sellers, is a negotiating advantage. The agent can use the tactic of appealing to higher authority during your negotiation.

Another advantage is that good agents know more about the possibilities for writing up a deal. Contracts can be drawn up to fit many different situations. If you simply fill in the blanks on a standard purchase and sale agreement, you have to wait for a buyer who fits the standard. There is no room for creativity.

On the other hand, if you are using a broker who simply puts your house on a web site and waits for the "right" buyer to come along, then fills in the blanks on a standard contract, why bother? Why waste your money?

A few other considerations include showing your house, advertising, determining a pricing strategy, and handling objections. Face it, most sellars know nothing about sales. Some agents don't know much more than their clients. While some agents know how to handle objections and sell your house, others are merely order takers.

If you think you have the skills and know how, why not try it yourself? However, the saying about attorneys may apply here as well. How did it go? The person who represents himself has a fool for a client and a jackass for an attorney. Be careful and know your limitations if you want to optimize your results.

Is Now The Time to Sell Your Home?

2005-05-04T16:45:00.000-07:00

An article in the April 27 issue of The Wall Street Journal cited evidence that apartment owners in the strongest real estate markets are seeing the best return on investment. The thinking is that the price of homes has gone up so much in those markets that people cannot afford to buy and are being forced to rent.

A fear is that if the economy cools, people may stop buying homes in the most speculative markets. Homeowners who were hoping to flip the properties would then be forced to rent the homes to create a positive cash flow. The inventory of rental properties would then increase and put downward pressure on rents. If they can’t be rented, we could see an increase in foreclosures and/or a downward pressure on prices.

Another downward pressure on prices will occur if the Fed’s interest rate hikes translate into higher mortgage interest rates. Remember, as interest rates go up, buyers can afford to pay less money for a house.

Each market is different. Watch the market in your area. Are there a lot of empty rental units? Has the average number of days on the market for houses that have sold increased? Those could be early indicators of a softening market. If you see a lot of rental units and increasing days on the market and you can withstand the bumps, hang on. If you need the cash, price your house for a quick sale.
(for more information go to http://robertclydeaffolter.com/articles)

Stocks or real estate?

2005-04-26T22:49:00.000-07:00

How strong is this economy? As the Fed increases interest rates we are seeing increased volatility in the stock market. Is the economy slowing due to the rate increases? Is the economy so strong that we should be concerned about inflation?
Those questions are difficult to answer. One of the keys I have been watching is the mortgage
After a period of low interest rates, perhaps home buyers will no longer pay higher rates. Or perhaps they can’t.
Over the past few years we have seen a rise in real estate market similar to the stock market increases of the 90's. Lowered interest rates certainly played a part in that movement. However, by now, real estate prices should have adjusted to the lowered interest rate and we should see a flattening out of price increases. If the increases were due to interest rates alone.
However, my hypothesis is that the real estate market also increased due to home improvement. The success of the home improvement stores are evidence that my hypothesis may be correct. During this time of nearly flat wages, home owners built home equity then refinanced or sold their houses to obtain cash. In my book, From Paint Rags to Riches, I call that "buying a second job."
If my hypothesis is correct, the real challenge may be coming pretty soon. There are limited improvements that can be made to a home. Once the floors are converted to hardwood, the oak trim is installed, the bathrooms and kitchens are remodeled there isn’t much left to do.
The question: Is the economy strong enough so that the first job will pay well enough so that homeowners can give up the second job? If so, we may see wage inflation which will allow the real estate market to go even higher. However, if the Fed pushes interest rates to the point that the mortgage interest rate rises despite low demand, we may see a retreat of prices. Builders may have to reduce margins as we are already seeing in some markets.
This is not the time to be wildly buying real estate. Stocks don't look much better. In either case, the careful investor who buys value should do well.

Stocks or real estate?

2005-04-25T08:53:00.000-07:00

The stock market has risen in the past few days. Should you be invested in stocks or real estate?
I don’t think it has to be an either/or situation. One of the ideas I continue to try to drive home is that if you own your personal residence you are invested in real estate.
Perhaps you also want to be invested in stocks. The principles are the same. If you are going to invest in property, you want a good return on your investment either in the form of rentals or appreciation in value so that you can sell the property at a profit. So you want a property with a good rental history or good prospects of continued earnings or you want a fixer (or a property with appreciation potential).
Similarly, in stocks, you want a company which pays a good dividend and has a good prospect of continued earnings or you want a fixer and that you believe will be turned around with new management (or a growth company). The key to either investment is knowing what you are doing. Leaving your stock picks up to your stock broker is about as intelligent as leaving your property picks up to your real estate broker.
Which do you know more about real estate or business?
We all have to live somewhere. By systematizing the learning process most of us can quickly recognize value in real estate. That’s one reason I believe real estate is a superior investment for the average investor.

Using a financial calculator

2005-04-23T07:58:00.000-07:00

In my book, From Paint Rags to Riches, I mention the importance of buying a financial calculator and learning to use it. Let me give you an example. The mortgage on a $200,000 house at 6% interest for 30 years will run $1,199 per month. If interest rates climb to 8%, how much home can that same buyer afford? $163,403.
Given that the growth in wages is nearly flat, what will happen to home sales and the price of homes if interest rates climb 2%? In the above example we saw a drop in price of nearly 20%.

Will the real estate market continue to rise?

2005-04-22T20:20:00.000-07:00

Will the bubble burst or will real estate prices continue to rise? Protect yourself from further declines by taking a few precautions. Read my articles: http://RobertClydeAffolter.com/articles